Exxon v. Emerald

On March 27, the Texas Supreme Court issued its opinions in two related cases, both styled Exxon Corporation v. Emerald Oil & Gas Company. The cases were argued before the court more than two years ago, and the decisions were awaited with much anticipation. The Court reversed a judgment against Exxon for $8.6 million in actual damages and $10 million in punitive damages.

The facts in the case are remarkable. In the 1950’s Exxon’s predecessor Humble Oil & Refining Company obtained oil and gas leases covering several thousand acres in Refugio County owned by the O’Connor family. The leases were quite unusual; among other things, they provided for a 50% landowners’ royalty. Exxon drilled 121 wells and produced more than 15 million barrels of oil and 65 billion cubic feet of gas from the O’Connor lands. In the 1980’s Exxon asked the O’Connors to reduced their royalty, claiming that the leases were becoming uneconomical. Those negotiations failed, and in 1989 Exxon notified the O’Connors that it intended to start plugging wells and abandoning the leases. Negotiations for the O’Connors to take over operation of the wells were not successful, and Exxon began plugging wells and abandoning the leases.

The O’Connors then leased some of the land to Emerald Oil & Gas. Emerald intended to re-enter the Exxon wells and produce them. But when Emerald tried to do so, it encountered problems; it found “junk” in the hole, and in some cases it found that Exxon had cut the casing and left it in the wells, and in some cases had dumped tank bottoms and other contaminants in the well, making it much more difficult for Emerald to re-enter the wells. After further investigation, the O’Connors and Emerald concluded that Exxon had intentionally sabotaged the wells so that they could not be re-entered. Not only that, but Exxon had falsified the plugging reports it submitted to the Texas Railroad Commission, failing to include in those reports what it had done to the wells.

Emerald and the O’Connors sued Exxon for plugging the wells improperly, committing waste, negligence, breach of the lease, and fraud. Trial was to a jury, which found that Exxon had committed waste and plugged the wells improperly, and acted with malice in doing so. The trail court entered a judgment against Exxon for $8.6 million in actual damages, $10 million in punitive damages, and $2,795,000 in prejudgment interest. Exxon appealed the case to the Corpus Christi Court of appeals, which affirmed the judgment. Exxon then sought review by the Texas Supreme Court.

One of Exxon’s points on appeal was that the plaintiffs had failed to bring their case on time. Under Texas law, the plaintiffs’ suit had to be filed within two years after they discovered or should have discovered the facts giving rise to their claims. The Texas Supreme Court held that the plaintiffs had failed to bring their suit within two years, and so their claims were barred.

Laws which limit the time within which a claim must be filed are called statutes of limitation, because they limit the time for filing a claim. Most tort claims in Texas have a two-year statute of limitations. This is shorter than in most states. Because an injured party may not become aware of his/her claim within two years, courts have fashioned a rule – the “discovery rule” – to mitigate the harshness of the limitation in certain limited circumstances. The discovery rule states that, if the injury is “inherently undiscoverable” and “objectively verifiable,” the two-year period does not begin to accrue, or is “tolled,” until the plaintiff knows or, by exercising reasonable diligence, should know of the facts giving rise to the claim.

In Exxon v. Emerald, the jury was asked when the plaintiffs discovered or in exercise of due diligence should have discovered that Exxon had sabotaged the wells, and it answered January 24, 1995. Since the case was filed in September 1996, the jury’s finding meant that, under the discovery rule, their claims were not time-barred, even though the wells had been plugged in 1990.

Another principle of law that is important here is that, where there is a dispute about facts, the jury determines the truth. Where there is a dispute about law, the judge determines the applicable law. A jury’s finding of a particular fact can be challenged on appeal, but the Supreme Court cannot overturn a jury’s finding unless there is “no evidence” in the record to support the jury’s determination.

On appeal, Exxon argued that the facts conclusively showed that the plaintiffs knew about its sabotaging of the wells before September 1996. Exxon pointed to a letter from Emerald to the O’Connors dated in June 1994, informing the O’Connors that Emerald had found cut casing or junk in five wells they had tried to re-enter. Emerald met with the O’Connors on January 24, 1995 and informed them about the full extend of damage to the wells and the discrepancies between the actual condition of the wells and Exxon’s plugging reports. The jury found that it was on that date, January 24, that the O’Connors had enough facts to know that they had a claim against Exxon for sabotaging the wells. But Exxon claimed that the plaintiffs had enough facts by June 1994 to know what Exxon had done, so that the plaintiffs’ claims should be time-barred “as a matter of law” and the jury’s finding should be disregarded. The Corpus Christi Court of Appeals ruled against Exxon:

We conclude that the 1994 letter does not establish discovery of the waste as a matter of law. Instead, the discovery rule tolls limitations until the intervenors knew of enough damage to know that the problems regarding the wells were not isolated. … [W]e are not willing to say that finding a few isolated problems on a small number of the wells that had been reentered to date establishes field-wide knowledge regarding systemic damage to some numerous wells as a matter of law.

The Texas Supreme Court disagreed. It held that the jury’s fact-finding on the discovery issue should be disregarded:

In June 1994, Emerald advised the royalty owners that it discovered that Exxon placed cut casing and junk in one or more wells. Therefore, …by June 1994, both Emerald and the royalty owners had actual knowledge of the facts underlying their negligence and tortuous interference claims.

One might argue that the Texas Supreme Court simply disagreed with the jury. But remember that a jury finding of fact can be overturned by the Supreme Court only if there is no evidence to support the jury’s finding. In any event, the Court concluded that Exxon did not have to pay any damages for its intentional sabotaging of wells on the O’Connor ranch.

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